48% 160% 136% MILITARY HEALTHCARE THE WAIT CONTINUES. Bottom Line Up Front. Trends & Issues
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1 Billions of Dollars MILITARY HEALTHCARE THE WAIT CONTINUES SEPTEMBER 2015 Bottom Line Up Front Increasing military healthcare expenditures are still failing to meet the needs of the military community. While both the growing awareness about the prevalence of mental illness in the military community and the VA scandal last year increased attention and funding for military healthcare, there still has not been marked enhancement in the care that is provided. Small pockets of limited progress have been made but lack of interoperability between the VA and DOD health record computer systems and limited adaptability to individual patient needs remain significant barriers to improvement. For DOD, rising healthcare costs are crowding out investments into readiness and procurement. For the VA, new programs and more funding have not resulted in an improved system that meets the needs of an evolving problem. Concurrently, Congress has proven incapable of passing reform that would effectively reign in military healthcare spending. All the while, a growing military and veteran population wait for promised reforms. Trends & Issues ECONOMIC REALITY DOD and VA health programs are ballooning to unsustainable levels as they crowd out other spending. LIMITED PROGRESS Discussions about military healthcare have increased in frequency but meaningful progress towards implementing reforms, collaboration, and solutions has been limited. DOD, VA, and Congress have repeatedly failed to address rising costs and better access and care, a role many NGOs are trying to fill. PERSONALIZED CARE Treatment of the impacts of sustained combat on servicemembers and veterans has been limited by a one-size fits all approach, high recidivism rates, and low levels of course completion. Care and treatment can be improved with more focus on active patient participation and personalized solutions VETERANS HEALTH ADMINISTRATION DEFENSE HEALTH PROGRAM % 160% 136% GROWTH IN NUMBER OF BENEFICIARIES GROWTH IN VETERANS HEALTH SPENDING GROWTH IN DEFENSE HEALTH SPENDING Source: DOD Greenbooks, VA Expenditure Tables 1
2 Discussion ECONOMIC REALITY DOD and VA struggle to modernize and improve quality of care while the cost of healthcare is ballooning at extraordinary rates. Expanded benefits, increased utilization rates, and lingering medical issues from years of combat underlie the rise in medical expenses, such as the 1,252% increase ($192 to $2,595 per claim) in the average cost of compound drugs from 2012 to $4.5 billion SHORTFALL IN DOD & VA BUDGET FOR HEALTHCARE IN 2015 For DOD, rising healthcare costs threaten procurement and research and development accounts, with healthcare spending growing from 4.7% to 6.5% of the base budget between 2001 and The Congressional Budget Office (CBO) projects this share to reach 11% of defense spending by 2028, not accounting for budget caps. In an era of fiscal constraint and scrutiny of the defense budget, this increased healthcare related spending has the potential to negatively impact U.S. military readiness and superiority. Yet, Congress has been reluctant, and often unable, to enact necessary reforms to military healthcare as any increase to the financial burden of servicemembers is deemed politically unpalatable. For the VA s Veterans Health Administration (VHA), medical care spending has risen by 160% from 2001 to This increase has been driven by military personnel transferring to the VA system from active duty, increased utilization rates, and rising costs per enrollee. Between 2002 and 2014, the number of VA healthcare enrollees increased by 34%, the number of patients increased by 51%, and the number of VA healthcare facility visitations increased by 98%. These significant increases have contributed to an overburdened VA and large appointment backlogs. 14 Years of Sustained Combat THEN AND NOW Pre-War Health Spending Post-War Health Spending $14 billion $33 billion Active Duty Active Duty $23 billion Veterans Healthcare Enrollees 4.4 million in TRICARE $3,065 per person 5.1million in VA $4,481 per person Mental Illness 132 thousand Diagnosed this year $59 billion Veterans Healthcare Enrollees 5.1 million in TRICARE $6,435 per person 9.1 million in VA $6,522 per person Mental Illness 232 thousand Diagnosed in out of 10 Active Duty Servicemembers have some form of mental illness 2
3 Millions MILITARY HEALTHCARE - THE WAIT CONTINUES $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 NUMBER OF HEALTHCARE ENROLLEES COSTS PER ENROLLEE $ TRICARE VHA Source: Evaluation of TRICARE Program Reports, VA Select Characteristics LIMITED PROGRESS Military healthcare, served by DOD s TRICARE system and the VA s Veterans Health Administration, continues to struggle in reform, collaboration, and modernization efforts. DOD, VA, and Congress have repeatedly failed to address issues with increased costs, servicemembers transitioning from TRICARE to VHA, and implementing complementary electronic health record (EHR) systems. The recommendations made by the Military Compensation and Retirement Modernization Commission (MCRMC) offer some of the clearest indication of the reforms required to address the challenges of modern military healthcare. Among several recommendations, one particularly controversial recommendation included the privatization of the military healthcare system. The commission argued that privatization would provide better access to care and save DOD $6 billion dollars a year. Servicemembers would receive a Basic Allowance for Health Care (BAHC) to offset the vast majority of the costs. However, the White House and Congress have rejected these recommendations, citing concerns over the complexity of such reforms while stating the system has proven itself through 14 years of combat operations. Smaller scale changes have also met controversy, as seen in the attempt to raise copayments to offset the meteoric rise in prescription drug costs. Debate on copayment increases has become the latest item on a long list of issues preventing a FY16 defense budget. Another area long overdue for modernization is how agencies track and record the medical history of servicemembers and veterans. The lack of interoperable electronic health records (EHR) has been a major impediment to meaningful collaboration between DOD and the VA. Servicemembers transitioning from DOD to the VA s healthcare system have been known to fall between the cracks because health records are not easily transferred, resulting in inconsistent diagnosis and treatment of the same medical issues. The work towards interoperable EHR systems has a long and troubled history. As early as 2007, Congress mandated the two departments to jointly develop interoperable EHR systems. Between October 2011 and June 2013, DOD and VA spent $564 million dollars on an Integrated Electronic Health Record (iehr) system but abandoned the effort due to reoccuring delays and cost overruns. 3
4 Recently, the two departments began pursuing independent EHR modernization programs with interoperable capabilities DOD awarded Leidos a $9 billion dollar contract to modernize its EHR system while the VA continues incremental modernization. However, the Government Accountability Office (GAO) reports that truly interoperable systems will not arrive until 2018 at the earliest, a testament to the difficulties in addressing this issue. MAJOR MILITARY HEALTHCARE EFFORTS MCRMC ESTABLISHED VA CHOICE PROGRAM ESTABLISHED WITH $10B FY13 NDAA: TRICARE COPAY LINKED TO COLA FY15 NDAA: TRICARE DRUG COPAYS INCREASED i EHR PROPOSED DOD ISSUES RFP FOR NEW EHR SYSTEM DOD AWARDS $9B EHR SYSTEM CONTRACT FY08 NDAA: VA & DOD TO MODERNIZE EHR VA & DOD AGREE TO USE i EHR BY 2017 FY14 NDAA: REQUIRE DOD & VA EHRS TO MEET NATIONAL STANDARDS BY 2015 MCRMC RELEASES REPORT VETERANS MENTAL HEALTH ACCESSIBILITY ACT FAILS TO GAIN TRACTION COLA EHR iehr MCRMC NDAA RFP Cost of Living Adjustment Electronic Health Record Integrated Electronic Health Record Military Compensation and Retirement Modernization Commission National Defense Authorization Act Request for Proposal VA & DOD CANCEL i EHR PROGRAM Although there are anecdotes of improving care, the macro-perception of a better VA system has not been realized. VA s increased funding requires reforms to increase the flexibility and adaptability of healthcare provision. For example, in the wake of last year s VA scandal, the $10 billion dollar Choice Program was established to improve medical care access and reduce VA backlogs. The program subsidizes the costs of non-va care for veterans who live farther than 40 miles from a VA facility or are facing longer than 30 days in waiting time. However, as of March 2015, only 5.5% of applicants had been approved for the program. The limited impact of the program has resulted in finger pointing between the VA and Congress. Congress blames the VA for poor implementation and not informing veterans of all the options available, while the VA blames Congress for setting overly strict eligibility requirements. Citing underutilization and need for funding flexibility, VA Secretary Robert McDonald even requested (and was approved) permission to shift Choice Program funding to help cover shortfalls in normal operations. Many non-governmental organizations have stepped into the vacuum of care left by the VA. The number of charities that support veterans and servicemembers has increased 41% over the past five years, with an estimated 40,000 nonprofit organizations claiming to serve these populations. With so many organizations, and different efforts, veterans often are the ones to lose as the lack 4
5 of coordination and information sharing between groups hampers research, some organizations take advantage of a generous public, and offered services do not always meet claims. Despite all of these problems, there is room for optimism as certain efforts are starting to change the landscape. One such effort includes the newly formed Warrior Care Network, a first-of-its-kind collaborative effort funded with $100 million by the Wounded Warrior Project. Partnering with leading academic health centers, the program aims to personalize and potentially standardize clinical care for veterans. % OF ACTIVE DUTY SERVICEMEMBERS DIAGNOSED WITH INITIAL MENTAL ILLNESS TOTAL diagnosed 2,126,512 16% 12% 10% PERSONALIZED CARE Source: Armed Forces Health Surveillance Center While budgets grow and caseloads increase, the population of veterans and servicemembers needing help swells. As an indicator of the extent of the problem, the number of servicemembers suffering from Post Traumatic Stress (PTS) and Traumatic Brain Injury (TBI), the invisible wounds of war, have shown sharp increases over the last decade with 315,000 new cases of TBI and 175,000 new cases of PTS since Despite years of research and treatment, the VA s 8 to 9-week programs have not been effective in relieving patients of symptoms, and four-month long VA sponsored intensive programs at twice the cost have not shown definitive results either. With all treatments, success ultimately depends on patient participation. Currently, the VA s mandated programs for PTS treatment have 30-40% noncompletion rates and often provide only moderate relief from symptoms. Veterans struggle to achieve long term benefits by failing to complete treatment plans. New healthcare programs must address the challenge of patient commitment, as patients incentivized to seek and complete treatments and empowered with knowledge about their overall well-being have better outcomes. As programs seek more personalized care, wearable technologies offer promise for patients to actively engage in their recovery and well being. Devices provide instantaneous feedback, allowing providers to monitor progress and participants to see results. Software applications such as those offered by Rally Health engage participants with financial rewards for monitoring and improving their health and well-being. This approach leverages human behavior and social psychology to increase personal motivation and investment in their own healthcare. 5
6 With the VA system overburdened and unable to provide persistent and consistent care, self-care is also being promoted by both the VA and non-governmental organizations. The VA offers numerous electronic services, including PTSD Coach and Mindfulness Coach applications for mobile devices, while efforts like the Home Base Program have expanded focus to include overall health and well-being, not just treating specific symptoms of PTS/TBI. DOD also has a number of initiatives underway to improve overall health with the focus on prevention and resilience. The Operation Live Well Program includes the recent Healthy Base Initiative, a pilot program designed to improve the health and wellness of military families by focusing on active lifestyles, improved access to quality food, and tobacco-free living. DOD plans to expand this effort once data is analyzed. An area of skepticism, however, is whether the program s results can be expanded upon, and leveraged, in a timely fashion to make a meaningful difference. Despite the growth of military healthcare spending, programs, and veteran services organizations, servicemembers and veterans are still not receiving the optimal healthcare experience. Groups continue to search for healthcare programs that encourage active and persistent participation, but continue to face bureaucratic challenges, inefficiencies amongst the thousands of organizations, and a growing population of inconsistent participants. These issues are impediments to maintaining a healthy fighting force and providing for veterans, and without remedies, the health needs of the military community will remain underserved. Glossary of Terms CBO Congressional Budget Office GAO NDAA PTS TBI VSO Government Accountability Office National Defense Authorization Act Post Traumatic Stress Traumatic Brain Injury Veteran Services Organizations Neptune Advisory th Street SE Washington, DC Scott Ellison scott@neptuneasc.com Kevin Jiang kevin@neptuneasc.com Patrick McCarthy, CFA patrick@neptuneasc.com David Schopler schop@neptuneasc.com This report is proprietary to Neptune Advisory and is intended for the exclusive use of the recipient and its employees and should not be copied or further distributed, circulated, disseminated, or discussed. Neptune Advisory does not provide advice, reports, or analyses regarding securities and this report should not be understood as performing any analysis or making any judgment or giving any opinion, judgment or other information pertaining to the nature, value, potential, or suitability of any particular investment. This report is based upon information believed to be reliable at the time it was prepared. However, Neptune Advisory cannot guarantee the accuracy or correctness of any judgment, opinion or other information contained in this report. Neptune Advisory, its partners, employees or agents have no obligation to correct, update, or revise this report or advise or inform recipient should Neptune Advisory or any of its partners, employees or agents determine that any judgment, opinion, or other information contained in this report is inaccurate or incorrect or should Neptune Advisory or any of its partners, employees or agents change their view as to any judgment, opinion or other information expressed herein. Neptune Advisory, its partners, employees and agents shall have no liability to you or any third party claiming through you with respect to your use of this report or for any errors of transmission. Partners and employees of Neptune Advisory or their family members may own securities or other financial interest of, or have other relationships or financial ties to, of one or more of the issuers discussed herein. 6
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